How to Develop an SLA for Third-Party Providers

Financial institutions (FIs) increasingly rely on third-party vendors for critical services such as IT infrastructure, payment processing, and data management. Clear communication of performance standards is essential to ensure vendors meet expectations.

One powerful tool for managing vendor accountability and performance is the service-level agreement (SLA).

SLAs set clear expectations for a service provider’s performance by clearly defining:

• Minimal performance requirements
• Corrective actions for unmet standards
• Cost incentives for exceeding expectations

SLAs strengthen vendor relationships by ensuring transparency, reliability, and accountability – setting the stage for a long, productive partnership.

Why are SLAs important?

Outsourcing activities to third and fourth parties introduces operational, reputational, and compliance risks, among others. For example, a vendor could experience a power outage, a data breach, or an accounting error—all of which could impact your FI’s operations and reputation or even cause consumer harm.

When partnering with fintechs, the risks may be even greater. Some fintechs lack the people, processes, and policies to navigate the rigorous regulatory environment FIs and traditional financial services vendors are accustomed to. That’s why evaluating potential fintechs with thorough due diligence and drafting a well-crafted SLA are critical steps before engaging in any vendor partnership.

SLAs vs. KPIs: What are the differences?

Financial institutions use service level agreements and key performance indicators (KPIs) as performance measurement tools, but these tools serve different purposes.

KPIs are quantifiable metrics that enable FIs to measure, monitor, and assess the success of their business objectives. KPIs look back, evaluating the success of past performance, revealing risk areas, struggles, and successes along the way.

When it comes to vendor management, KPIs help a financial institution measure the value and effectiveness of a third-party vendor relationship. Some of these KPIs are internal, such as those measuring return on investment (ROI) on a vendor relationship or the number of consumer complaints received about a product or service provided by the vendor.

Other KPIs come directly from a vendor. Examples include system uptime, employee training completion, dispute resolution time, incident response time, or patch management efficiency, just to name a few.

An SLA is a tool financial institutions use to outline specific KPIs a vendor must achieve and the penalties for non-compliance. Not every KPI an institution tracks is included in an SLA. It is reserved for the most essential performance metrics.

How to develop an SLA

While time-consuming, drafting an SLA is critical in safeguarding your financial institution’s operations and customer trust.

Don’t know where to begin? Here’s a step-by-step guide:

1. Define the service. Define the specific service(s) the vendor will provide and establish clear performance indicators that quantify that service’s success. These indicators might include uptime percentages, processing times, or error rates. Verify service levels by comparing performance or output against best practices.

2. Write SMART-R metrics. Develop performance metrics that are:

• Specific. Clearly define your metrics. They should always be objective and not subjective.
• Measurable. Ensure the metrics are measurable. Include days, numbers, rates, etc.
• Achievable. Set goals that the vendor can realistically attain. Draw from industry benchmarks and best practices.
• Relevant. The metrics should relate to the FI’s needs and why this specific vendor is contracted for the service, product, or platform.
• Time-bound. Include a timeframe(s) for achieving goals.
• Reportable. Add a mechanism for gathering data and reporting on the SLAs to ensure the information required to meet the goals is available.

3. Determine the reporting frequency. Determine how often performance reports will be delivered, the recipients, and the reporting format. Transparency is critical to maintaining oversight and ensuring corrective actions are implemented swiftly.

4. Review the SLA with stakeholders. Involve both internal and external stakeholders in SLA-focused discussions. Review the document with internal teams (risk, compliance, and business owners) and the vendor to ensure everyone is on the same page.

5. Prepare the SLA document. Incorporate the SLA into the vendor contract as an addendum or as part of the original agreement. Ensure it includes details on reporting timelines, metrics, incentives, penalties, and dispute resolution processes.

Did you know? The Nvendor survey tool allows users to build performance reports that can help track and report SLAs.

SLA example 

While every SLA will look different based on the vendor, service, and partnership goals, use the template for an IT provider below to get started.

Service Availability

The hosted service and websites shall be available an average of 99.75% of the time per month. Availability is defined as 24 hours a day, 365 days per year, excluding scheduled maintenance and any unplanned changes for which the Vendor has provided at least seven (7) days advance notice.

Reporting

As part of the monthly reporting cycle, the service provider will report results against this SLA within five (5) business days after the first business day of the following month.

Monthly Credit for Percentage Achieved

If the service availability percentage falls below the defined thresholds, the following monthly credit will apply:

• 99.74% to 99.60%: $1,000 credit
• 99.59% to 97%**: $2,000 credit

Note: These specific terms provide a clear framework for accountability and incentivize the Vendor to meet or exceed expectations.

Exclusions

Availability calculations shall exclude scheduled maintenance and any unplanned changes notified at least seven (7) days in advance.

Terms and Conditions

This SLA remains in effect until terminated or amended by mutual agreement of both parties.

What do regulators say about SLAs?

Developing SLAs is more than just an industry best practice. Regulators are carefully evaluating FIs for vendor-related violations. In October 2024, the Consumer Financial Protection Bureau issued an order against a credit union for violating the Consumer Financial Protection Act of 2010 due to operational outages caused by poor vendor management.

The Federal Financial Institutions Examination Council (FFIEC) provides guidance on developing SLAs in its “Outsourcing Technology Services Booklet,” stating that FIs should “link SLAs to provisions in the contract regarding incentives, penalties, and contract cancellation to protect themselves against service provider performance failures.” The guidance also provides a few key areas SLAs should address, including availability and timeliness of services, confidentiality of data, and business continuity compliance.

There is also guidance specific to different institutions. The National Credit Union Administration (NCUA) advises credit unions (CUs) to address performance standards and measures when drafting SLAs. At the same time, the FDIC, OCC and Federal Reserve say a bank’s management must determine “minimum requirements for the service level agreements” when engaging with third parties.

SLAs are more than contractual clauses. They are foundational tools for managing vendor relationships and mitigating the many risks FIs face. By adopting best practices for SLA development and implementing them into vendor agreements, your FI can enhance transparency, ensure reliable service, and meet regulatory expectations.

Want more info on how to motivate your vendor to reach performance benchmarks?

Read our SLA Whitepaper for more best practices, tips and more!